Why falling junk bond yields aren’t benefiting all issuers

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Nov. 20 2020, Updated 4:50 p.m. ET

Secondary market trends in high-yield bonds

Yields on high-yield debt (JNK) fell last week. Yields, as measured by the BofA Merrill Lynch US High Yield Master II Effective Yield Index, decreased by 24 basis points or 0.24% over the week ending October 24, to come in at 5.98%. This was the lowest level in over a month.

A number of refinancing-related transactions hit the primary markets last week as a result. Please refer to the previous two sections of this series for more detail on these transactions. Issuers took advantage of lower yields to reduce their borrowing costs.

Part 4

Issuers withdraw junk bond transactions

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In addition to the deals that hit the market last week, a number of deals were pulled as well. Companies have withdrawn four deals in the past two weeks, bringing the total deal withdrawals to 13 in 2014 year to date. Although yields have fallen, not-so well-known names would probably find it difficult to find financing on favorable terms.

As we’ve mentioned in a previous update, markets are pricing higher yields for lower-rated junk debt and exhibiting relative risk aversion. Read Why volatility in high-yield debt is quality-driven to learn more.

ETF impact of falling junk bond yields

Bond prices and yields move in opposite directions. When yields fall, bond prices tend to rise and vice versa. Due to the decline in yields last week, returns on high yield debt were positive.

Both the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK), rose by 1.1% over the week ending October 24. The PowerShares Fundamental High Yield Corporate Bond ETF (PHB) was up by 0.8%.

Comparing the performance of stock market ETFs

Major stock indices were also up in the week ending October 24. ETFs like the SPDR S&P 500 ETF (SPY) and the PowerShares QQQ (QQQ) were up by 4.2% and 6.0%, respectively. Stocks benefited from positive earnings releases by large cap firms like Proctor & Gamble (PG), Goldman Sachs (GS), and Microsoft (MSFT). This spurred the S&P 500 Index (SPY) to its biggest weekly gain of 2014.

In the next section, we’ll discuss the causes of falling yields and investor momentum in junk bond mutual funds.

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